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In-line quarter; capacity expansion to drive superior volume growth

* Sagar Cement’s Q1FY23 EBITDA fell 43% YoY but remained flat QoQ at Rs610mn, in line with our estimates. EBITDA/ton declined by 58% YoY/5% QoQ to Rs514.

* Sagar has recently increased its capacity by 43% to 8.3mt and is likely to register an industry-leading volume CAGR of 19% over FY22-25E, aided by a low base and capacity expansion.

* In May’22, the company issued 13.2mn equity shares (10% stake) to Premji Invest at Rs265/sh, totalling Rs3.5bn, to fund growth capex.

* Factoring in higher opex/ton, we reduce our FY23 EBITDA estimates by ~4%, but keep our FY24/FY25 estimates unchanged. We retain Buy with an unchanged TP of Rs225. Our DCF-based TP implies a 1-year forward EV/EBITDA of 8x.

Revenue rises 42% YoY to Rs5.6bn. 

Volumes increased 35% YoY to 1.19mt, in line with our estimates. Sagar has reiterated its volume growth guidance of 40% to 5mt for FY23. It expects flat volumes from existing markets and growth from new capacities. Cement realization increased 5-6% YoY and QoQ to Rs4,702 per ton. Prices were flat across key markets in Jul’22, except for Odisha where the prices dropped by Rs10/bag from Jun-exit prices.

EBITDA declines 43% YoY but flat QoQ at Rs610mn

and EBITDA/ton fell 58% YoY/5% QoQ to Rs514 - both broadly in line with our estimates. On full capacity, fuel inventory has been secured for 2 months for coal and 45 days for petcoke. Sagar is aiming for a 6-month inventory as coal/petcoke prices stabilize. The current fuel mix is 70% domestic coal and 30% petcoke. Sagar registered a net loss of Rs72mn as the commissioning of capacities led to higher depreciation and interest costs. It has guided for flat power and fuel cost/ton QoQ in Q2, and benefits of the recent correction in coal/petcoke prices should be witnessed from mid-Q3FY23.

Project updates:

FY23 capex guidance of Rs300mn remains unchanged. Capacity utilization at Jeerabad/Jajpur plants stood at 46%/sub-10% in Q1. Management mentioned that Jeerabad/Jajpur plants are expected to generate positive EBITDA at a capacity utilization of 50%/40%. The Jajpur plant is expected to reach 35-40% capacity utilization after the monsoon.

Gross debt flat QoQ at Rs14.9bn

of which Rs5bn is for acquisition. The board has approved a proposal to submit a resolution plan in connection with the corporate insolvency resolution process on an application filed in respect of Andhra Cements. The resolution plan will be submitted before August 18, 2022. Sagar expects clearance by the end of Sep’22 or earlyOct’22, post which it will likely take three months for maintenance.

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